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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Calculating taxes on the sale of Investment Property

Customer Question

How do I calculate capital gains/loss on investment property when I sell it?
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

Your cost basis is determined by taking your original purchase price (plus any non-recurring closing costs) and adding the cost of any improvements made during ownership and then subtracting any allowable depreciation (whether claimed or not). If you inherited the property you would claim as your acquisition cost the value for the asset claimed in the decedents estate tax return. If no estate tax return was filed then you use the fair market value of the asset (supported by an appraisal if not readily determinable) as of the date of death.

Your net sales price is the contract selling price less any selling costs (i.e. broker commissions and other transaction costs as well as fix-up expenses if real property is involved).

The difference between your net sales price and your cost basis (adjusted for improvements and depreciation) is your capital gain.

If you own the property for more then one year, then the gain will be treated as a long-term gain and will be taxed up to a maximum capital gain rate of 15% (5% if the gain would otherwise be taxable in the 10% and 15% brackets). Otherwise the gain is treated as a short-term capital gain and to the extent not offset by other capital losses will be considered as ordinary income the same as wages and interest subject to whatever your marginal tax rate is. Don't forget state taxes.
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: How do I calculate the allowable depreciation? The property is in Florida...we had the house built in 1984 and paid $80,000 for the property. It's currently on the market for $160,000.
Expert:  Christopher Phelps replied 11 years ago.

Assuming your property is a rental you should have been deducting depreciation every year.

During what time periods has th eproperty been rented? What was th eapproximate value of the property when you begain renting it? Did you make any substantial improvements (i.e. a roof, etc.) that you did not deduct as repairs and when did you make them? Are you working with a tax preparer or did you have one prepare your returns in the past?

Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: The property has always been a rental and I'm almost certain that depreciation was deducted every year...I'll have to check with my Mom. The property has been rented since it was built in 1984. It has undergone substantial improvemnents (including a roof) recently, thanks to the many hurricanes in Florida last year. The repairs were completed this past March. The property is in my Mom's name and she has always worked with a tax preparer. Can you use both scenarios to help me calculate depreciation:
1--depreciation has been deducted every year
2--depreciation has not been deducted every year
Expert:  Christopher Phelps replied 11 years ago.

First, the tax preparer should be able to provide you with the adjusted cost basis of the property.

When real property is placed in service, the cost is typically split between the building and land. The cost allocated to the building is depreciable, the land is not.

Having said that, given the timing of when the property was first rented, its likely that the main building structure was depreciated using the accelerated cost recovery system (ACRS) method over either 15 years or 18 years. Thus, the main building structure is fully depreciated. However, the improvements start depreciating once they are made. They may also have been depreciated using either the ACRS method or the MACRS method which was mandatory for property placed in service starting in 1987. Also, in calculating your adjusted cost basis for gain calculation purposes, you must reduce your original cost basis by allowable depreciation whether it was actually deducted or not.

The botXXXXX XXXXXne is that I can not figure the allowable depreciation for you without knowing the exact original cost of the property, how it was split between land and building or how much improvements cost and when they were placed in service. Also, there may be other costs to consider such as refinancing costs that may be amortized and other property such as appliances and furniture that may have been capitalized and depreciated to some extent.

Get with the tax preparer and see what records they have available regarding the rental property tax basis. That is your best bet. Also, if your parents have had any rental losses suspended because they had too much income, those losses become deductible in the year of sale.

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